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A Thought Paper on “Supply Chain Network Design & Optimization Services” from the Business Consulting Group

A Thought Paper on “Supply Chain Network Design & Optimization Services” from the Business Consulting Group

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    Supply chain-network-optimization-services 16 Supply chain-network-optimization-services 16 Document Transcript

    • Value Creation ThroughSupply Chain NetworkOptimization To AddressDynamic Supply ChainA Thought Paper on “Supply Chain Network Design & Optimization Services”from the Business Consulting Group
    • IntroductionSupply chain management has become one of movement by rail is less and it needs furtherthe crucial focus areas in many businesses. It expansions. Tax benefits rules over theencompasses planning and management of all operational efficiency resulting in increasingactivities involved in sourcing, production, number of stocking points. This, added towarehousing and distribution of products. highly fragmented demands, nullifies theMany companies enjoy significant business benefits of economies of scale. Indiansuccess in lieu of unique ways in which they economy is growing at a rate of 8% & ishave designed their supply chain and how they supposed to grow in the same pace till 2020.react towards changes in internal & external By 2025 it is expected to be the world’s fifthfactors. largest economy. There will be a major population shift to cities and it is expected thatLeading businesses operating in developed many new growing geographies will come innations understood the importance of supply existence. So the pattern and geography ofchain and there is good amount of maturity demand picture is expected to undergo majorlevel in their processes. This is aided by the shift.improved infrastructure and fiscal policies inthose countries to a great extent. But majority As discussed there are macro & microof businesses in developing countries such as economic factors that may lead to subIndia need to go a long way in achieving ben- optimality in supply chain, and this needs to beefits of a mature supply chain. addressed. Many companies are working in this direction and undertaking supply chainTo clarify the above point, take the example of network redesign exercise to reap benefits inlogistics cost. Logistics cost as a percentage of the short and long term.GDP in countries like US & UK is less than 8%of GDP, while in India example, it is 14 to 15%of GDP.Taking India as an example, we highlight thedynamic and evolving nature of supply chains.In India, the high logistics costs can be attrib-uted to poor transport infrastructure and to agreat extent the complex fiscal structurecurrently existing in India. The freight 2
    • Dynamic Supply Chain & Value LeversMany companies are investing in processes, tools and resources to achieve operational efficiencyin supply chain planning. They are going for integrated planning with the objective of increasedcustomer service level, responsiveness, on time in full delivery and so on. There are manyquestions which still remain unanswered and which are related to company’s ultimate objective: Is the cost factor considered for planning and is it the end-to-end supply chain cost which is considered? What is the basis of Cost to Serve models; is it profit maximization/cost minimization? Is there any consideration of working capital productivity and fixed asset efficiency in planning? Is the current network the most suitable one or needs some changes considering current & future scenarios? What are the action plans on tactical & strategic level and whether they are aligned?The figure below shows the linkage between the main organizational value levers and differentsupply chain performance attributes. The supply chain performance attributes described boilsdown to four main key supply chain levers. Organizational Supply Chain Key Supply Value Levers Performance Attributes Chain Levers Reliability Resource Acquisition Increase Revenue Responsiveness Structural Decisions Flow/ROCE (Current & Future) Flexibility Enhance Shareholder Value Operating Policies Increased Free Cash Reduce Cost Supply Chain Costs Operational Efficiency Increase Working Working Capital Capital Efficiency Productivity Increase Fixed Assets Fixed Asset Efficiency Productivity Improve Future Lower Supply prospects Chain Risks 3
    • Resource Acquisition: Acquiring and divesting right resources at right quantum at right place at right time. Resources can be production units, warehouses etc Structural Decision: Realignment of capacity, reduction in echelons in network etc Operating Policies: Policy decisions basis cost to company view. E.g. production strategy to react to seasonality in demand Operational Efficiency: Efficient execution & control of day to day operationsOne of the most important considerations in supply chain and operations is cost. The supply chainnetwork optimization model also focuses in optimizing “cost to serve” considering end to endsupply chain cost, while maintaining necessary service level. Hence identifying end-to-end supplychain cost and cost drivers becomes one of the important considerations in network designexercise.Dynamic Supply Chain Cost Structures & the need for OptimizationCompanies are increasingly focusing on cost perspective along with service requirements duringplanning & design of supply chain network. The initiative goes in a way to find the most costoptimized way in meeting key objectives for a good supply chain as shown in figure below: Inventory costs Facility costs Transportation costs Operating costs Asset costs Customer satisfaction Sales growth Levels of service Increased market share Response timesIn the current scenario, where market & demand is highly fragmented, companies are coming upwith different models of sourcing & distribution. The supply chain is getting complex and numberof echelons are increasing to get fiscal benefits. Companies have created numerous facilities(sourcing, manufacturing, Centralized DCs/Warehouses) with tangible & intangible benefits inmind. While intangible benefits usually based on strategic intent, tangible benefits are mostly costbased. 4
    • Figure below gives the set of cost involved in different legs of multi echelon supply chain network: Regional Wholesale Suppliers Production Plant Centralized DCs Warehouses Dealers Raw material basic Conversion fixed cost Outbound transportation cost Cost Conversion variable cost (Primary & Secondary) Taxes/ duties Facility fixed cost Handling cost Freight cost Opening/Closing cost Inventory cost Capacity addition Capacity expansion & realignment cost Facility fixed cost & realignment cost Outbound transportation cost Facility expansion cost Taxes & Duties Opening/Closing cost Handling & Inventory cost Taxes & DutiesFor companies it becomes very important to make decisions basis end-to-end supply chain cost.The recommendations coming out of network design exercise when balanced with strategicintent gives a good picture about the roles of different facilities in supply chain. Because of thedynamic nature of supply chain, these supply chain network design decisions need to beperiodically revisited.Drivers for Supply Chain Network DesignThe need for supply chain network design can be because of many internal and external factors:Internal Factors: The supply chain operation is majorly divided into four main functionsnamely sourcing, production, logistics and sales/customer service. It has been observed that thealignment regarding their individual (function specific) and company objectives are not very welldefined which leads to inter functional conflict in objectives. Different functions working on theirindividual objectives lead to local optimization and not enjoy the benefits of global optimization.The cost associated to achieve certain level of service level becomes high when compared tooptimization done in keeping end-to-end cost in picture. 5
    • CONFLICTING OBJECTIVES SALES / SOURCING MANUFACTURING LOGISTICS CUSTOMER SERVICE Stable volume Long runs Warehousing Availability Large quantities Stable volume - Less inventory Flexibility Large leadtime High buffer inventory - Smooth flow Responsiveness (order (RM/FG) - Less SKUs cycle time) Transportation - Full Truck LoadExternal Factors: The supply chain design is based on many factors and should ideally keepon changing as these factors changes. It is very important to analyze the sensitivity of supplychain network of a company against changes happening in these factors. Some of the importantfactors are: Demand Factors: Increase/Decrease/Shift in demand, type of demand like regional / fragmented / homogenous demand Fiscal Factors: Tax structure & policy change in due course of time Infrastructural Factors: Availability and cost of labour, transportation facilities and neces- sary utilities Competitive Factors: New entrant/existing competitors & competitive intensity, New product introduction, expansion into new markets, pricing strategyBecause of the impact of internal and external factors, supply chain network becomes suboptimalover a period. It becomes very important to have periodic assessments carried out to alignnetwork with supply chain strategy considering changes in factors.Illustration:Ferdows in his paper “Making the most of foreign factories” has discussed how the rolesassociated with manufacturing plants changes because of changes happening in internal &external factors. He devised a framework to understand the position of manufacturing plant in agiven network. The two dimensions for defining roles of manufacturing plant are reason ofexploitation and level of strategic intent involved.Reason of exploitation includes low cost input factors, technological knowhow & marketproximity. Level of strategic intent means degree of contribution of plants to the companystrategy. It means plant contribution related to other processes next to production (like product &process improvement, procurement planning, logistics planning), acting as an innovation partnerwith head office and becoming knowledge hub for other plants. 6
    • For example, plants which have been established in areas like Baddi (H.P) in India are mainlybecause of the tax exemptions provided by the Indian government. The period of exemption islikely to finish in near future. Most of the companies are revisiting the future role to be played bythese manufacturing units. There are three options left with them: To increase their strategic role To run plant only to satisfy local demands To shut them or shift the facilities to other region which are profitable to the companyAny of the three options requires a clear definition in time phase basis on how to manage therequired shift.Our approach to Supply Chain Network DesignSupply Chain Network Design requires a powerful modeling approach to deliver significantimprovements in supply chain cost structures and service levels. It needs to incorporate modelingof fixed and variable costs for all the main activities and cost drivers in a supply chain network:purchasing, production, warehousing, inventory, and transportation. ITC Infotech has devised aunique approach to model & design supply chain network services – the same is described furtherin this paper.I. Network Design & Optimization Models Overview:Network Design is a process to determine the unique network configuration for the supply chainthat offers the lowest total cost/ highest total profit considering operational and financial risk whileachieving targeted Service Levels. The figure below gives an illustration of how Network designexercise helps in finalizing Zone of indifference / Range of indifference where supply chain costis minimal basis various tradeoffs involved. In network design exercise performance simulation isalso done to validate the feasibility of supply chain strategies. Overhead Risk Adjusted Network Cost Drivers Optimal Transportation Costs Costs ($) • Inbound • Outbound Range of Indifference Inventory Costs Facility Costs Total Costs Number of Warehouses 7
    • Network design exercise involves many decision variables like location and capacity of facilities,product – location combination decisions, decisions on transportation lanes etc subject to realworld constraints of capacity, manufacturing, sourcing and serviceability requirements. Thussupply chain network design provides answers to some of the key questions in supply chainnetwork.II. Questions answered by Supply Chain Network Design & Optimization Models:  Technology required for each of the process Resource  How many manufacturing & distribution facilities Acquisition  Where should each facility be Long Term  How large it should be  Time phase build up of capacity  What process at which facility Strategic Structural  What product to be stocked or processed at what facility Decisions Medium Term  What transportation modes & lanes to be used for moving products  Which market to be served from which facility  How much should I store/ ship and store (especially when Operating seasonality is present) Policies  Build ahead Inventory & Production strategy  How should I go for process investment e.g.automation Tactical (in time phase manner)  What should be my network flow for monthly demand Operational Short Term  What should be my commitment against monthly demand Efficiency  How should I staff my plant (permanent vs temporary)  Minor exceptions in network structureThe four key supply chain levers explained earlier poses many questions which needs to beanswered. Most of the questions that will be answered by Network design exercise are detailed inthe figure. The strategic & tactical decisions can further be seen as long term, medium term & shortterm decisions basis the lead time to finalize and implement the changes.The table below is basis a leading CPG company in India. It explains the planning horizon,frequency and bucket for Network design exercise carried out for Short term/Medium Term & Longterm decisions. Parameters Short term Medium Term Long Term Horizon 1-3 Months 1-24 Months 1-5 Years Frequency Monthly Quarterly Semi annually/Yearly Planning Bucket Weekly/Monthly Monthly Quarterly/Yearly 8
    • Because of the number of decision variables and constraints involved, it is very difficult to performthis exercise manually or with excel tools. There are some best in class tools available which canaid the process of network designIII. Supply Chain Network Optimization tools:Supply chain network optimization tools provide end-to-end supply chain modeling which includessourcing, manufacturing and distribution. These tools provide options to incorporate large numberof constraints with lot of decision variables. The best in class tools in this category are i2 Strategist,supply chain guru, IBM network optimization workbench etcKey aspects include its ability to: Model the entire supply chain from raw materials to finished products to delivery Improve strategic and tactical decision making with visibility into network design, sourcing and capacity Plan for uncertainties with what-if scenario generation and analysis Understand and project the inventory costs of network design decisions based on stochastic parametersNetwork design projects are usually carried out in multiple logically sequenced steps.IV. ITC Infotech’s Supply Chain Network Optimization Approach:Our approach for Network design exercise is a six step approach as given below As Is Strategy Information Baseline Scenario Scenario Analysis & & Operations Gathering Development Visioning Strategy formulation Recommendations Assessment Analyze supply Detail information Define modeling Review baseline Basis what if Run & analyze the chain processes & requirements scope like assumptions & analysis confirm set final scenario enablers processes, facilities result with business of scenarios Collect data and products to be Detail the benefits Map current required considered Make necessary Optimize, analyze & coming from it operations strategy changes if needed sensitize alternative Assess data Develop model & strategies Detail the reasons & Determine supply available & it’s create database Once model is changes need to be chain cost drivers & hygiene formats confirm do Perform cross made constraints sensitivity analysis alternative sensitive Assess & analyze Detail assumptions analysis Give the final Understand information made Develop various recommendations & customer needs what if scenarios Detail recommenda- to be action points Develop time Develop activity tions from different to the business Complexity estimates based costing scenarios reduction & simplification of Run & analyze Basis recommenda- requirements baseline model tions finalize the scenario with Develop conceptual Compare results business team model with the actual cost incurred Define the degree of error for different cost heads (Tolerance level) 9
    • Putting Supply Chain Network Design & Optimization to WorkThis is a case study of one of India’s leading CPG companies.Objective: Recommend “To-Be” supply chain network in short term, medium term & long termbasis minimum overall cost (end-to-end cost involving Vendor-Production Unit-CentralizedDCs-Regional Warehouses)Background: Our client has a high growth business, with a mature planning process. The busi-ness wanted to incorporate holistic cost perspective in planning.Description: Our Objective was to design a time based supply chain network, which works on minimum cost to serve model. Costs involved - RM/PM landed cost + Conversion cost + Transportation cost + Fiscal cost + Inventory handling/carrying cost. Different fixed costs and facility opening/closing costs are also involved Decision Variables – Vendor - Factory mapping, Factory - DC/Warehouse mapping, DC-Warehouse mapping, Factory-Product mapping Subject to – Customer service constraints, Factory Minimum/Maximum Capacity constraints, changeover constraints, packing constraints & transportation capacity constraintsModel Outcome: Finalization of sourcing strategy Product planning (Where to produce & how much to produce) Finished goods network from production unit till warehouses – Via centralized DCs vs.direct to serve to regional warehouses Capability realignment Opening/Closing of facilities in time phase manner 10
    • SummarySupply Chain Network Design is a powerfulmodeling approach which has been proven todeliver significant reduction in supply chaincost and improvements in service levels. Itincorporates end-to-end supply chain cost:purchasing, production, warehousing,inventory, and transportation. Companies canrevisit their network periodically consideringchanges in business scenarios like newproduct introduction, changes in demandpattern and new supply sources so as to alignsupply chain network. Also companies canreap cost and competitive advantage byundertaking supply chain network optimizationexercise in response to big ticket changes infiscal policy like change in taxes, tax rebatesetc. References Paper by Kasra Ferdows “Making the most of foreign factories” 11
    • About the Author(s)Rohit Shukla is a Lead Consultant in thesupply chain practice at ITC Infotech. He holdsa degree in electrical engineering with an MBAin operations and supply chain management.Rohit has over 7 years of experience in supplychain management in Electronics and CPGdomain.Jimmy Thomas is a Lead Consultant in thesupply chain practice at ITC Infotech. He holdsa degree in Mechanical engineering with anMBA in operations and supply chainmanagement.Jimmy has over 7 years of expe-rience in supply chain management in Automo-tive and CPG domain. About the ITC Infotech Business Consulting group ITC Infotech’s Business Consulting Group provides rich business consulting capabilities across key business functions such as product design & development, manufacturing & supply chain management, sales & service, loyalty & customer relationship management, etc. The group has expert practices around Enterprise Performance Management, CRM and Loyalty, SCM and Operational Excellence, Auto ID Solutions and Corporate Sustainability. Our domain experts and management consultants bring in expertise of addressing customer needs and problem statements in these areas across verticals such as CPG, Retail, Process & Discrete Manufacturing, Travel & Hospitality, Banking & Financial Services and Logistics & Transportation. 12
    • For more information please write to: contact.us@itcinfotech.comwww.itcinfotech.com © Copyright 2012, ITC Infotech. All rights reserved. No part of this document may be reproduced, stored in a retrieval system, trans- mitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the express written permis- sion from ITC Infotech. The information contained herein is subject to change without notice. All other trademarks mentioned herein are the property of their respective owners. 13